Developed States O&G Risk/Reward Ratings

Europe | Oil & Gas | Mon Oct 01, 2012

BMI View: S table ranking s , despite some small movement in individual scores, ha ve allowed North America to continue its strong performance in the developed states oil and gas risk/reward ratings . However, a wave of exploration and production in the developed states is likely to translate into future gains i n the region's rewards scores, raising the entire risk/reward rating.

Outperformers Highlight Of Stable Ratings

The highlight to a relatively stable developed states risk/reward ratings (RRRs) is the continued wave of exploration and production (E&P) targeting the developed markets. The US and Canada remain at the forefront of a boom in oil and gas production, yet Norway and the UK are increasingly enjoying renewed upstream activity. For Norway and the UK, increased offshore activity has the potential to slow, or stem, the decline in production from mature fields. Norway has enjoyed a number of significant offshore discoveries of late, while the UK has reaped big benefits from fiscal incentives that have to-date been positively received, with an uptick in investment.

Strong upside risks to Industry Rewards come with increased upstream exploration. North America, Norway and the UK are set continue enjoying the biggest rewards, but with an end to an offshore drilling moratorium in Italy and increasing prospectivity in the Mediterranean potentially supporting an upcoming licensing round in Greece, the zone of activity may be set to spread.

Booming natural gas production in North America has continued to depress prices, weighing on corporate earnings, and along with a slight decrease in our US gas production forecast, has led to a small decline in our upstream ratings for the US and Canada.

Refinery rationalisation in Europe continues to keep downstream scores low - the outlook for North America benefits from access to lower cost feedstock from domestic production - but we continue to foresee volatile downstream business, particularly for Developed Europe which will see continued pressure on refining margins as new capacity East of the Suez comes online.

North America has maintained a lead across our RRRs, with the largest divergence in the upstream, where large reserves and increased production of conventional and unconventional oil and gas have led to strong rankings. In Europe, increased exploration has led to big gains for Norway, with significant discoveries presenting upside risks to our long-term forecasts and prompting Norwegian national oil company (NOC) Statoil to aim to produce more in 2020 than in 2011, a reversal from previous aim to simply maintain previous levels ( see our online service, August 28 2012,'New Discoveries Lift Long-Term Production Forecast').

Table: Oil & Gas Upstream Risk/Reward Ratings

Upstream Industry Rewards

Upstream Country Rewards

Upstream Rewards

Upstream Industry Risks

Upstream Country Risks

Upstream Risks

Upstream R/R Ratings

Rank

Source: BMI

Canada

71

100

78

95

86

92

82

1

US

58

100

68

90

83

88

74

2

Norway

44

80

53

80

91

84

62

3

Germany

30

70

40

90

85

88

54

4

UK

20

100

40

90

81

87

54

5

Italy

35

45

38

60

72

64

46

6

Denmark

21

50

28

80

87

82

45

7

Spain

13

55

23

85

77

82

41

8

Belgium

8

45

17

60

81

67

32

9

France

8

40

16

60

77

66

31

10

Greece

0

5

1.25

40

61

47

15

11

Average

28

63

37

75

80

77

49

Beyondthetraditional outperformers, wehighlight potentialfor futureincreases inperformanceforparticularcountries on the back of recent development. As mentioned, Italy's decision to end the moratorium on offshore drilling-issued following the Gulf of Mexico disaster in 2010-will allow some EUR4.5bn of previously approved investments to move forward. Moreover, Greece's decision to undertake seismic surveys comes in preparation for a 2013/2014 licensing round that,despite the country's fiscal woes,may draw strong interest given a series ofprolificdiscoveries in the Eastern Mediterranean ( see ' Seismic Tender Opens A New Market In The Eastern Med, ' August 31 ).

Beyond North America, Western Europe remains split on tapping its shale gas resourcesdue toenvironmental concerns related to fraccing, with France and Germany imposing nationwide and regional bans respectively. However,the UK has taken tentative steps toward tappingitsshale gasresources. Despite political uncertainty,the issuance ofwhat maywellbe a moregas-friendly energy policyin Autumn 2012bodes well for the likelihoodthatthe process will eventually take place on UK soil.

Opportunity For Rich Developed States

Developed States Oil & Gas Risk/Reward Ratings

Looking Downstream

Although rankings remained stable, a worsening macroeconomic outlook contributed to lower scores for Spain's downstream rewards. Falling crude consumption in Greece helped improve the country's downstream rewards, although it remained at the bottom of our rankings. Overall, downstream rankings held steady, with the scores between North America and Europe reflecting the greatest convergence. Only one point separates second-ranked Canada and third-ranked Germany in terms of our overall RRRs.

Table: Oil & Gas Downstream Risk/Reward Ratings

Downstream Industry Rewards

Downstream Country Rewards

Downstream Rewards

Downstream Industry Risks

Downstream Country Risks

Downstream Risks

Downstream R/R Ratings

Rank

Source: BMI

US

50

84

59

85

77

82

66

1

Canada

50

68

55

90

76

84

63

2

Germany

44

76

52

90

73

83

62

3

UK

41

80

51

80

71

76

58

4

Belgium

37

54

41

95

63

82

53

5

Spain

30

56

37

90

59

78

49

6

Italy

36

58

41

60

63

61

47

7

Norway

36

34

35

70

80

74

47

8

France

33

56

39

60

68

63

46

9

Denmark

21

46

27

90

80

86

45

10

Greece

21

38

25

60

49

55

34

11

Average

36

59

42

79

69

75

52

Demand Grows Slow

Among the factors weighing on downstream scores is our forecast for demand growth,where we see decreasing economic activity contributing to slower demand for both oil and gas, with several developed states set to experience little to no growth over our six-year average. Relatively higher demand for oil in Norway and gas in Greece are outliers to the weak demand growth across the developed states. Aside the impact of economic concerns, gains in efficiency will ensure that primary demand growth globally comes from outside the developed markets, marking a shift in historical consumption patterns.

Demand, Like Rankings Holds Stead

Scores for Oil And Gas Demand Growth, Six-Year Average, Scores out of 10

Despite continued deteriorating economic conditions across many developed statesandvolatileoilprices, risks stayed largelysteady,withpolitical risk, corruption and physical infrastructure contributing to anumber of countries with relatively similar scores. Underperformingcountrieswere weighed down by the continued crisis in theeurozoneandagenerally less liberal energy market compared to higher performingpeers.

More Than Enough Risk To Go Around - Developed States Oil & Gas Risk/Reward Ratings

Looking Ahead

With our forecast for relatively high oil prices to remain in the medium term, E&P in developedstates shouldcontinue to enjoy strong incentives.However,each market will face localised risks.High labour costs in Norway's oil sector and the threat of strikes, or inadequate midstream infrastructure in North America, are among the above ground risks that well weigh on ratings in the shortterm.

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